Fears for Spain and Slovenia as EU demands urgent action on economies

Brussels

The European Commission raised the red flag for Spain and Slovenia today, warning that urgent action is needed to address imbalances threatening their economic stability.

The report on vulnerable EU nations aims to stop economic imbalances spiralling into the kind of crises that crippled Greece, Ireland, Portugal and Cyprus. Olli Rehn, the EU official responsible for economic affairs, said the findings should serve as "a necessary wake-up call" for member states.

Spain and Slovenia were singled out for "excessive" imbalances, including large debt, high deficits and problems in the banking sector. Slovenia has been widely touted as the next struggling eurozone state to request assistance, after a controversial bailout for Cyprus last month saw large depositors in their two biggest banks take losses.

The Slovenian Prime Minister, Alenka Bratusek, on Tuesday denied speculation that the country would need a bailout.

The Organisation for Economic Co-operation and Development, however, has warned that urgent reforms are needed "to restore confidence and head off the risks of a prolonged downturn". The EU recommended recapitalising and privatising the country's banks, while actively seeking foreign investment.

Spain, meanwhile, has borrowed €40bn (£34bn) from the eurozone to recapitalise its banks. But despite implementing an aggressive reform programme, the EU found that the country's "high domestic and external debt levels continue to pose serious risks for growth and financial stability".

While the EU acknowledged the package of reforms under way in Spain, it suggested they have yet to bear fruit and more needs to be done to encourage growth and tackle crippling unemployment, which is expected to reach 27 per cent this year. The report also raised concerns that France's growth could be "hampered by long-standing imbalances".

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